One of the world’s most famous investors says the historic volatility roiling stocks right now is fuelled by two consequential transitions in financial markets. Read on [/np_storybar]

The Standard & Poor’s 500 Index will drop another 10 per cent to 1,650 and oil could fall as low as $20 a barrel as investors flee for safety, according to Scott Minerd, chief investment officer of Guggenheim Partners. Jeffrey Rottinghaus, whose T. Rowe Price mutual fund beat 99 per cent of rivals over the past year, said stock prices could fall another 10 per cent as the U.S. economy slips into a mild recession.

“I expect a protracted decline in the S&P 500,” Jeffrey Gundlach, co-founder of DoubleLine Capital, said in an e-mailed response to questions. “Investors should sell the bounce-back rally which could come at any time.”

The S&P 500 fell as much as 3.7 per cent Wednesday, the most since August, before partially recovering to close at 1,859.33, down 1.2 per cent. All 30 members of the Dow Jones Industrial Average were below prices at the beginning of the year, with the index down 1.6 per cent for the day and 9.5 per cent since Dec. 31. Oil fell 6.7 per cent to $26.55, down 28 per cent year-to- date.

This is a financial crisis and not an economic crisis

“Excessive risk exposure is adding to the selling pressure,” Gundlach said. “Today’s plunge into the lows looked like a margin call liquidation type of event.”

Rottinghaus, manager of the $203 million T. Rowe Price U.S. Large-Cap Core Fund, said “industrials and commodities have been in a recession for at least six months” in the U.S. “What we are trying to figure out is how much that bleeds into the consumer side of the economy,” he said in an interview.

Waiting for a Catalyst

Russ Koesterich, global chief investment strategist at BlackRock Inc., said there needs to be a fundamental catalyst to signal a market bottom, whether it comes from corporate earnings, economic data or an improvement in China.

“You need to have some stabilization of fundamentals to give people conviction this has gone too far,” Koesterich, whose firm is the world’s largest money manager, said in an interview. “Certainly you are getting closer to capitulation. The magnitude of the drop suggests that.”

Hedge fund manager Ray Dalio said global markets face risks to the downside as economies near the end of a long-term debt cycle. The Federal Reserve’s next move will be toward quantitative easing, rather than monetary tightening, the founder of Bridgewater Associates said in an interview with CNBC from the World Economic Forum in Davos. That won’t be easy, because rates are already so low, he said.

Risks to Downside

“When you hit zero, you can’t lower interest rates anymore,” Dalio said, according to a transcript of the interview. “That end of the long-term debt cycle is the issue that means that the risks are asymmetric on the downside because risks are comparatively high at the same time there’s not an ability to ease.”

The rout in global stocks is being fueled by investors seeking to reduce leverage as central bank run out of options to prop up economies, according to Janus Capital Group Inc.’s Bill Gross.

“Real economies are being levered with QEs and negative interest rates to little effect,” Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said in an e-mail responding to questions from Bloomberg. “Markets sense this lack of growth potential and observe recessions beginning in major emerging-market economies.”

While overseas economies are wobbling, the U.S. remains an island of stability, according to money managers such as Omar Aguilar, chief investment officer for equities at Charles Schwab Corp.

A Stable Economy

“This is a financial crisis and not an economic crisis,” Aguilar said during a conference call. “The U.S. economy is stable.”

Data on the housing market, unemployment and government spending still support U.S. gross domestic product growth, Aguilar said. Oil markets will rise later this year when supply drops in response to current low prices, according to Mihir Worah, co-manager of the $89.9 billion Pimco Total Return Fund.

“We continue to expect oil markets to balance in the second half of the year, and expect oil prices to move higher from current levels as a result,” Worah said in an e-mail. “While we aware of the risks, we still expect U.S. GDP growth to come in around 2 per cent.”

David Herro, manager of the $24 billion Oakmark International Fund, said low energy prices should support consumer spending, the biggest part of the U.S. economy.

“I don’t think the drop in equity prices is at all warranted by economic fundamentals,” Herro wrote in an e-mail.